Wednesday, May 18, 2011

Cutting Costs Sees an Increase in Profits for Dell

Good news recently came out of Dell as the computer company reported that its net income for the last quarter nearly tripled as Dell benefited from lower computer component costs and growth in certain areas of its more profitable product lines.

Dell's shares rose 5% in extended trading, beating analysts' adjusted net income estimates but coming a bit short of revenue estimates. For Dell's first three months, which ended on April 29th, Dell earned $945 million, which equals about $0.49 per share, which was higher than the $341 million, $0.17 per share of last year.

If you exclude one-time items, Dell earned $0.55 per share which easily beat the numbers expected by Wall Street. Analysts polled by FactSet estimated adjusted earnings of $0.43 per share. Revenue rose only 1% to $15.02 billion from $14.9 billion last year, which was short of the predicted $15.4 billion. Product revenue remained the same at $12.1 billion with services revenue rising 6% to $3.0 billion.

Dell's consumer section, which accounts for nearly 20% of the company's revenue, dropped 7% to $3.0 billion as well. Consumer demand also fell more than anticipated and in an interview, CFO Brian Gladden attributed some of the cause to "the market for consumer PCs being saturated in developed countries." He also added that "while tablet computers are still a small portion of the PC market, there's clearly an impact for them on consumer demand for traditional PCs."

Revenue from large enterprises increased by 5% to $4.5 billion with revenue from small and medium-sized businesses increasing 7% to $3.8 billion. Public sector revenue, on the other hand, saw a decline of 2% to $3.8 billion. Dell saw the biggest gain in servers and networking. In this category revenue rose 11% to $2.0 billion. Sales of desktop PCs fell 8% to $3.3 billion with mobile PCs rising 3% to $4.7 billion.

Dell has been working hard to increase their proportion of server computers, data storage devices and technology consulting services sold. According to Dell, these areas are more profitable than the company's base PC business. However, compared with one year ago, most of Dell's product categories accounted for nearly the same percentage of revenue and computers for consumers, and businesses continued to make up over half of Dell's revenue.

However, Dell's gross margin, which is still an indicator of the efficiency of Dell's business, came in at 22.9% which was higher than the 20.4% expected by analysts from Reuters. Dell's strategy of focusing on more profitable areas of business and cutting back on lower-margin offerings is working extremely well according to Gladden.

Andy Hargreaves, an analyst for Pacific Crest, thinks that Dell's gross margin is "impressive" and stated that "Dell should be able to keep it up for now." Hargreaves also stated, "They do have the potential to sustain margins long-term, but in order to do so they have to drive toward more services-oriented businesses."

Taking a look at this current quarter, Dell is predicting that revenue will rise by a percentage in the mid-single digits over the first quarter, slightly faster than its seasonal 2% to 3% growth. Analysts are expecting somewhere around $16 billion. Dell continues to expect revenue to grow 5% to 9% for the full fiscal year which implies a total of $64.6 billion to $67 billion with analysts expecting around $64.4 billion.

Dell saw shares rise $0.86, or roughly 5.4%, to a total of $16.76 in extended trading. The stock finished regular trading down $0.10 to $15.90.